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Blockbuster, Borders, Ambac, TerreStar: Bankruptcy

Feb. 17 (Bloomberg) -- Movie rental chain Blockbuster Inc. may be running out of cash or might liquidate, if papers filed last night by the landlords for 38 stores are correct. Or, Blockbuster may be on the cusp of another round of store closings.

The landlords say they haven’t been paid February’s rent, even though bankruptcy law requires “timely” payment on leases after a Chapter 11 filing.

The landlords want the bankruptcy judge either to require immediate payment of rent or declare the leases rejected. A hearing date hasn’t been set on the motion. The landlords include Centro Properties Group and USB Realty Investors LLC.

Blockbuster is already scheduled to face Summit Entertainment LLC at a Feb. 24 hearing where the video supplier alleges it hasn’t been paid for goods delivered after bankruptcy.

Blockbuster filed an operating report for five weeks ended Jan. 1 showing a $26.1 million operating loss on total revenue of $206.5 million.

The net loss was $11.7 million thanks to a reversal of $6.1 million in reorganization costs and $9.3 million of income from non-bankrupt subsidiaries.

Blockbuster had cash on Jan. 2 of $66.2 million. At the same time, accounts payable were $145.8 million, with accrued expenses at $194.4 million.

Blockbuster filed under Chapter 11 after negotiating the outline of a debt-for-equity swap with holders of 80 percent of the $630 million in 11.75 percent senior-secured notes. The plan and accompanying disclosure statement are yet to be filed.

After bankruptcy, Blockbuster rejected approximately 220 leases for stores previously closing. Blockbuster said it would close 72 additional stores by the end of 2010 and another approximately 110 in the first quarter of 2011.

Dallas-based Blockbuster began reorganization in September with 5,600 stores, including 3,300 in the U.S. and the remainder abroad. Among the U.S. stores, 3,000 were owned. The rest are franchised. About 200 stores closed before bankruptcy.

The petition listed assets of $1.017 billion against debt of $1.465 billion. Blockbuster estimated it owes $57 million in accounts payable in addition to the secured and subordinated notes.

The case is In re Blockbuster Inc., 10-14997, U.S. Bankruptcy Court, Southern District of New York (Manhattan).


Borders Trade Suppliers Owed $302 Million

Borders Group Inc., the book retailer that filed for reorganization yesterday in New York, will close 200 of its 642 stores initially and may close another 75.

The going-out-of-business sales will be conducted by a joint venture among Hilco Merchant Resources LLC, SB Capital Group LLC and Tiger Capital Corp. There will be an auction to test whether another group of liquidators will make a better offer.

Borders, based in Ann Arbor, Michigan, listed assets of $1.275 billion and liabilities totaling $1.293 billion. Debt includes $196 million owing on a revolving credit where General Electric Capital Corp. and Bank of America NA are agents. There is a $48.6 million term loan, secured by other assets, with GA Capital LLC as agent.

Trade suppliers are owed $302 million for inventory.

Borders has a commitment for $505 million in financing where GECC and GA Capital will be agents. When Borders was trying to avoid a bankruptcy filing, GECC made a commitment for $550 million in secured financing. The commitment had several conditions Borders couldn’t satisfy. For details on the conditions, click here for the Jan. 28 Bloomberg bankruptcy report.

Unlike the pre-bankruptcy version, the $505 million financing commitment has no requirement for $125 million in subordinate financing. The loan provides for $400 million to be available on an interim basis.

At the so-called first-day hearing yesterday, Borders was given interim approval for the loan. The new financing will pay off the existing term loan and revolving credit.

Lacking capital to be a “viable competitor,” Borders said it will use Chapter 11 to provide “the opportunity to achieve a proper infusion of capital.” Elsewhere in the bankruptcy papers, Borders blamed its failure on “external economic and competitive factors.”

In negotiations before bankruptcy, trade suppliers were represented by Lowenstein Sandler PC. Landlords were using Kelley Drye & Warren LLP as counsel.

Borders is 31 percent owned by Pershing Square Capital Management LP and 15.4 percent by LeBow Gamma LP.

Borders generated net sales of $2.3 billion for the fiscal year ended Jan. 29. Through Dec. 25, the loss was about $168 million, court papers said. For the fiscal year ended Jan. 30, 2010, the net loss was $110.2 million and the operating loss was $84.9 million on revenue of $2.791 billion.

For other Bloomberg coverage, click here and here.

The case is In re Borders Group Inc., 11-10614, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Ambac Aims to Stop IRS Suit in Federal District Court

Ambac Financial Group Inc., the parent holding company for an insurance company partially in rehabilitation, will be in bankruptcy court today looking for a preliminary injunction to stop the U.S. Justice Department from continuing a lawsuit filed on behalf of the Internal Revenue Service in a federal district court in Wisconsin.

The suit for the IRS aims at setting aside an order from a Wisconsin state court prohibiting the IRS from collecting taxes from subsidiary Ambac Assurance Corp., the municipal bond insurer with $50 billion in policies undergoing rehabilitation.

The Ambac parent contends the suit for the IRS violated an agreed order signed by the bankruptcy judge in November where the government agreed to give five days’ notice before taking any action to collect taxes. Ambac wants the Wisconsin federal court suit halted by the bankruptcy judge for failure to give the required five days’ notice.

Ambac said in its papers this week that the IRS suit could wreck both the subsidiary insurance company’s rehabilitation and the parent’s Chapter 11 case. The IRS, among other things, is likely intent on recovering $700 million in refunds paid last year, most of which went to the insurance subsidiary.

Click here for the story in the Nov. 10 Bloomberg bankruptcy report about the disputes with the IRS, and click here for the Feb. 11 Bloomberg bankruptcy report and a rundown on the new suit on behalf of the IRS.

At today’s hearing, the creditors’ committee is opposing Ambac’s requested six month extension of the exclusive right to file a plan. The committee says no plan is yet filed because company executives are “hopelessly conflicted” given that they also serve as officers for the insurance subsidiary.

The committee says the only plan they will support would contain provisions disadvantageous to the subsidiary.

The committee listed several disputes standing in the way of a plan for the parent. The principal unresolved issue involves how tax-loss carryforwards will be shared between parent and subsidiary.

In January the Wisconsin state court approved a plan for rehabilitation of the part of Ambac Assurance that’s in rehabilitation. Policy holders are to receive 25 percent in cash and the remainder in notes.

The insurance subsidiary stopped paying dividends to the parent in 2007 and stopped writing new business entirely in mid-2008. The Ambac parent filed under Chapter 11 in November. The Ambac parent listed assets of $90.7 million and liabilities totaling $1.624 billion, virtually all unsecured. Nearly all the debt is made of up $1.622 billion owing on seven note issues. One issue for $400 million is subordinated.

The new suit for the IRS is U.S. v. Wisconsin State Circuit Court for Dane County, 11-00099, U.S. District Court, Western District of Wisconsin (Madison). The state case is In re The Rehabilitation of Segregated Account of Ambac Assurance Corp., 2010cv001576, Dane County, Wisconsin, Circuit Court (Madison). The parent’s Chapter 11 case is In re Ambac Financial Group Inc., 10-15973, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

TerreStar Abandons Plan, Holding Company Files

TerreStar Corp., the indirect parent of TerreStar Networks Inc., filed under Chapter 11 yesterday along with subsidiary TerreStar Holdings Inc.

In court, TerreStar Networks said it was dropping the Chapter 11 reorganization plan that was scheduled for approval at a March 4 confirmation hearing. The company previously said it would pursue a sale to produce a more favorable outcome for creditors.

Along with the new Chapter 11 filings yesterday, the companies said that TerreStar New York Inc. and six Motient companies will drop out of the consolidated proceedings with TerreStar Networks. Those companies will reorganize together with the two that filed in Chapter 11 yesterday.

The court filings said the two groups of companies will move ahead on different timetables in view of “substantial differences between their businesses, stakeholders, and the circumstances that required them to seek Chapter 11 relief.”

For the parent holding company, Solus Alternative Asset Management LP is to provide a $13.4 million in financing.

Under the plan that TerreStar Networks, a satellite-based mobile phone provider, abandoned yesterday, control of the business would have gone to EchoStar Corp. For details on the now-abandoned plan, click here for the Dec. 23 Bloomberg bankruptcy report.

TerreStar, based in Reston, Virginia, provides mobile satellite coverage throughout the U.S. and Canada where traditional mobile networks are unavailable.

EchoStar is a television equipment and satellite services company.

TerreStar Networks listed assets $1.4 billion and debt totaling $1.64 billion. In addition to $944 million in 15 percent senior secured pay-in-kind notes and $179 million in 6.5 percent exchangeable pay-in-kind notes, debt includes $86 million on a purchase money credit agreement.

The older case is In re TerreStar Networks Inc., 10-15446, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The holding company case is In re TerreStar Corp., 11-10612, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

New Filing

Alabama Aircraft Files in Delaware to Bust Pensions

Alabama Aircraft Industries Inc., a provider of scheduled maintenance for U.S. military aircraft, filed for Chapter 11 relief on Feb. 15 in Delaware after negotiations with the union failed regarding the pension plan.

AAI, previously known as Pemco Aeroplex Inc., operates under a long-term lease at the Birmingham International Airport in Alabama. The company chiefly maintains and repairs transport, tanker and patrol aircraft.

The company said it’s been unable to make required $5.7 million annual payments toward the pension plan for union workers. At the end of 2010, the plan was underfunded by $31.5 million, court papers says. The Pension Benefit Guaranty Corp. is putting liens on the assets as a result.

The PBGC is listed with the largest unsecured claim, $68.5 million.

AAI said negotiations failed with the union over reducing pension obligations under the collective bargaining agreement. Saying pension obligations were the “primary driving force” behind bankruptcy, the company said it will invoke powers in the U.S. Bankruptcy Code “in the near term” to reduce ongoing pension obligations.

A fund affiliated with Tennenbaum Capital Partners LLC is owed $2.5 million on a note.

A court paper said assets were on the books for more than $32 million in September.

The case is In re Alabama Aircraft Industries Inc., 11-10452, U.S. Bankruptcy Court, District of Delaware (Wilmington).


Ahern Misses Bond Interest Payment, Price Down 37%

Ahern Rentals Inc., a Las Vegas-based equipment supplier, didn’t make a $10.9 million interest payment due Feb. 15 on the $236.7 million in 9.25 percent second-lien notes.

Ahern said it has a forbearance agreement covering the $350 million first-lien revolving credit and the $95 million term loan.

Ahern said that the nonpayment had “support” from a majority of the holders of the defaulted notes. Ahern said there has been a “significant improvement” in the business.

The bonds last traded yesterday at 35.5 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Yesterday’s last trade represented a 37 percent decline from 56 cents on the dollar, the last reported trade the day before.

Ahern had 72 locations in November.

The company reported a $39.1 million operating loss in the first three quarters of 2010 on revenue of $213 million. The net loss for the period was $67.1 million. Over the same period in 2009, the net loss was 448.2 million.


Dave & Buster’s Downgraded on Dividend to Owners

Dave & Buster’s Inc. was downgraded one notch yesterday by Standard & Poor’s to a B- corporate credit on news the restaurant operator would issue $100 million in new pay-in-kind notes to finance a dividend to shareholders.

The senior unsecured notes also fell one notch to CCC+.

The 57 restaurant and entertainment complexes were acquired in May by management and Oak Hill Capital Partners.

The company is based in Dallas.

Daily Podcast

Registration Exemptions, MERS Problems, Hotel: Bankruptcy Audio

The bankruptcy podcast discusses how Point Blank Solutions Inc. may be the test case for the Securities and Exchange Commission in stopping an allegedly improper use of equity rights offerings. Next, the implications arising from the decision by a New York bankruptcy judge ruling that the MERS system for recording mortgages can’t be used to prove who owns a mortgage or mortgage note is analyzed. Bloomberg Law’s Lee Pacchia and Bloomberg News bankruptcy columnist Bill Rochelle close by talking about the ability to purchase an uncompleted hotel near the airport in Las Vegas. To listen, click here.

Advance Sheets

Market Value Not Proper When Markets Disfunctional

Market value when the markets are dysfunctional is not the proper value for calculating damages from termination of a repurchase agreement, the U.S. Court of Appeals in Philadelphia ruled yesterday.

The case involved American Home Mortgage Investment Corp., as the company was known when it filed under Chapter 11 in August 2007. It made so-called Alt-A loans to individuals who couldn’t qualify as prime borrowers but still weren’t subprime. The mortgage servicing business was sold to Wilbur Ross’ newly formed AH Mortgage Acquisition Co.

Just before bankruptcy, a subsidiary of Credit Agricole SA called a default and terminated a repurchase agreement where the repurchase price was $1.14 billion for a package of 5,700 mortgage loans with an unpaid principal balance of about $1.2 billion. The bank filed a proof of claim and later claimed the deficiency in August 2008 was about $480 million.

The parties agreed that the market was “dysfunctional” when American Home filed in Chapter 11.

U.S. Bankruptcy Judge Christopher Sontchi looked at the governing statute, Section 562 of the U.S. Bankruptcy Code, held a trial, heard expert witnesses, applied the discounted cash flow method of valuation, and concluded that the mortgage loans on the termination date were worth more than the repurchase value. Sontchi therefore threw out the bank’s multihundred million dollar deficiency claim. The bank appealed.

The 3rd U.S. Circuit Court of Appeals in Philadelphia upheld Sontchi by ruling that market value isn’t the proper method for valuation when the markets are dysfunctional. The appeals court said using the discounted cash flow method was correct.

The circuit court was construing portions of Section 562 which say that the measure of damages for a repurchase agreement is “commercially reasonable determinants of value.” The court said that market value isn’t the only measure of damages when markets are dysfunctional.

The opinion, by Circuit Judge Dolores K. Sloviter, said that Section 562 is not ambiguous even though the parties have different interpretations.

The appellate court said Sontchi was also correct when he said market value is the proper measure of value when markets are operating properly.

Sloviter said that if Congress meant for market value to be the only method, it would have said so.

Sloviter said that it was case of first impression, meaning that no federal circuit court had before ruled on the question.

American Home confirmed a liquidating Chapter 11 plan in February 2009 that was implemented in November 2010.

The appeals court case is Credit Agricole Corporate & Investment Bank New York Branch v. American Home Mortgage Holdings Inc. (In re American Home Mortgage Holdings Inc.), 09-4295, 3rd U.S. Circuit Court of Appeals (Philadelphia). The case in bankruptcy court is In re American Home Mortgage Holdings Inc., 07-11047, U.S. Bankruptcy Court, District of Delaware (Wilmington).

To contact the reporter on this story: Bill Rochelle in New York at

To contact the editor responsible for this story: John Pickering at

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